No Money Down Mortgages Stage a Comeback

Two credit unions, NASA Federal Credit Union and Navy Federal Credit Union, are offering members mortgages without requiring any down payment or mortgage insurance.

No money down mortgages were among the types of housing finance loans blamed for causing the housing finance crisis in 2007. Such mortgages would seem to run counter to the prevailing trend in housing finance regulation, which seeks to make sure participants in all parts of the lending process have a stake in the loan.

But executives from both credit unions defended offering the loans, maintaining that a mixture of underwriting standards and member relationships protected them from losses on the loans.

Bill White, vice president of residential lending at the 84,000-member $1.2 billion NASA Federal Credit Union, declined to say what percentage of the credit union’s housing finance lending did not require a down payment. But he said that the volume in such loans was in the millions of dollars. The credit union booked $170 million in housing finance loans in 2012, White reported.

NASA FCU has confidence in the no money down loans because the credit union underwrites those more tightly than it does loans that are underwritten to the standard for the secondary market required by Fannie Mae and Freddie Mac, White explained.

Because no money down loans cannot be sold on the secondary market, the credit union’s no down payment offerings are destined for its own portfolio.

The credit union, which has a nationwide field of membership based on SEGs, also limits the no down payment loans to real estate markets in the credit union’s closest region, the Washington, D.C., suburbs, where NASA believes it best knows the market and where the credit union is confident housing prices have hit bottom.

“We focus on the ability to repay the loan as the standard independent of what might happen to the value of the underlying asset,” White said, contrasting NASA’s no money down loans to the sorts of no down payment lending that helped fuel the housing finance crisis. Those previous no money down loans offered by other financial institutions and mortgage brokers had been made on the assumption of rising real estate values, he explained, but NASA’s program focused on ability to repay.

But if a member had the financial wherewithal to be able to easily repay the loan, why would they necessarily want a no money down mortgage?

White explained that some members were financially able to make mortgage payments but were not interested in tying down liquid assets in housing finance.

He also explained that the loans carried an interest rate premium and that members understood they would pay a slightly higher interest rate.

NASA ran the program past the NCUA for risk, and White said that after 36 months of offering the loans, there had been no problems with delinquency. “These loans work well for the credit union and our members,” he said. The NCUA did not confirm that its staff reviewed the credit union’s no money down program and has not reported how many credit unions around the country may offer similar programs. Aside from Navy Federal, White said he didn’t know of any others.

The 4.2 million-member $52.4 billion Navy Federal Credit Union, by contrast, offers what it calls the Homebuyers Choice to all its members and doesn’t underwrite the no money down loans differently than other mortgages, according to the housing finance executives with the nation’s largest credit union.

“We underwrite all of our loans so our members can succeed with the loan,” said Katie Miller, vice president for mortgage products, adding that the no money down loans are extremely popular with members who might not be able to come up the typical $20,000 down payment for a conventional mortgage from another lender.

The credit union also makes $2,500 available to members to help with closing costs and the loans allow up to 6% of the purchase price to come from the seller, according to the credit union’s website.

Miller and Richard Morris, vice president of mortgage products and GSE relationships, put the loans in the context of the relationship Navy Federal has with its members, which is unlike the relationships other financial institution customers have with their financial institutions.

“We know and trust our members, and we believe they know and trust us,” Morris explained. “It really is all about our members. They understand how the credit union seeks to help them and they want to help the credit union too.”

Miller said the credit union had offered the no money down mortgages prior to 2008, but then put the program on a hiatus until February 2010 in order to re-examine and evaluate the loan portfolio. Subsequently they began to offer the loans again, she said, and reported the loans perform very well.